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Discounting Utility and the Evaluation of Climate Policy

In: The Economics of the Global Environment

Author

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  • Larry Karp

    (University of California)

Abstract

This essay discusses the relation between utility discounting and climate policy. Using a cost-benefit model, I show that the planner’s willingness to pay to eliminate a climate event is greater, but less sensitive to discounting, when the event is random instead of deterministic. Examples in an optimizing setting show that policy may be less sensitive to discounting, the more nonlinear is the underlying model. I then explain why, in general, there should be no presumption that the risk of catastrophe swamps discounting in the assessment of climate policy. I conclude by pointing out that intertemporal transfers between the same agent at different points in their life, and transfers between different agents at different points in time, are qualitatively different, and should not be assessed using the same discount rate.

Suggested Citation

  • Larry Karp, 2016. "Discounting Utility and the Evaluation of Climate Policy," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 423-446, Springer.
    • Handle: RePEc:spr:steccp:978-3-319-31943-8_19
    DOI: 10.1007/978-3-319-31943-8_19
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